When Is A Guarantee Unenforceable?

A creditor who loans money has a duty not to breach its contract or act "unconscionably" towards the guarantor or surety of the loan. Accordingly, only in the most egregious circumstances will a Court discharge a guarantee on the basis of the creditor's improper conduct.

A recent decision of the Ontario Court of Appeal, Bank of Montreal v. Javed, 2016 ONCA 49, per Lauwers J.A. ("Javed") illustrates that a guarantor or surety will not lightly be discharged from obligations under a guarantee based on the creditor's behavior.

The Facts

In Javed, the defendant Shah and his co-defendant Javed gave the Bank a joint and several guarantee to secure a small business loan to their company. The parties operated a donut restaurant. The Bank loaned the company $213,486. Shah's guarantee was limited to $53,371, in addition to interest.

Ultimately, Shah resigned from the company. The company defaulted on its loan and the Bank demanded payment from Shah under his guarantee.

Shah defended the Bank's action against him, in part, by arguing that when he contacted the Bank to obtain the company's business account information following his resignation from the company, the Bank refused to provide it to him. The Bank claimed that Shah was not entitled to the information because he was no longer an authorized signing officer for the Company's business account.

The motions judge dismissed Shah's position. The Court granted judgment against Shah on the guarantee in the amount of $53,371.

On appeal, Shah argued that the Bank's conduct in refusing to provide information to him amounted to "unconscionable" conduct and a breach of contract.

The Court of Appeal held that the Bank's conduct was not unconscionable. The Court further held that while the Bank's failure to provide Shah with disclosure amounted to a breach of its contract, the breach was not serious enough to warrant discharging Shah from his obligations under the guarantee.

1. The New Duty of Honest Contractual Performance Does Not Extend the Doctrine of Unconscionability

   The Court's first lesson in Javed is that the Supreme Court of Canada's recent recognition of a duty of "honest contractual performance" in Bhasin v. Hrynew, 2014 SCC 71 ("Bhasin") did not extend the doctrine of "unconscionability" in contract law.

   The doctrine of unconscionability provides that a contract is unenforceable where its terms are extremely unfair or one-sided, particularly if there is an inequality of bargaining power between...